6. Mergers and Acquisitions (30 points) a. In merger and acquisition deals, the empirical evidence shows that acquirers pay a premium over the current market price to acquire the shares of the target firms. On average the premium is 30%. Why would acquirers pay such high premiums? Name and DISCUSS two reasons in details. (10 points) b. To compare organic growth versus acquisition, please fill in the blanks marked X1 -- X11 in Table 5 below. In the acquisition, the market value of the target asset (XS) is $200 million higher than the intrinsic or DCF value (X3). Show detailed steps that lead to each X's. Assume a constant growth model for all cases. For X5 and X11, round the percentages to 2 decimal places, e.g., 1.23%. (20 points) Table 5. Organic Growth versus Acquisition: Fill in the Blanks! 5 Million, Percent Acquirer 25.000 Organic growth 2.000 1296 250 29 3,000 8,000 Acquired growth Increase Growth Of the Target Asset by 18% 2.000 X6 250 900 3596 X7 (X8) (X) X10 X11 900 Revenues Expected growth NOPLAT Invested capital ROIC DCF value Market value Premium (30%) Value creation Value creation acquirer value 20% X1 35% X3 (200) X2 X4 X5 WACC is assumed to be 10% for the Acquirer and 15% for the organic growth/acquired asset 6. Mergers and Acquisitions (30 points) a. In merger and acquisition deals, the empirical evidence shows that acquirers pay a premium over the current market price to acquire the shares of the target firms. On average the premium is 30%. Why would acquirers pay such high premiums? Name and DISCUSS two reasons in details. (10 points) b. To compare organic growth versus acquisition, please fill in the blanks marked X1 -- X11 in Table 5 below. In the acquisition, the market value of the target asset (XS) is $200 million higher than the intrinsic or DCF value (X3). Show detailed steps that lead to each X's. Assume a constant growth model for all cases. For X5 and X11, round the percentages to 2 decimal places, e.g., 1.23%. (20 points) Table 5. Organic Growth versus Acquisition: Fill in the Blanks! 5 Million, Percent Acquirer 25.000 Organic growth 2.000 1296 250 29 3,000 8,000 Acquired growth Increase Growth Of the Target Asset by 18% 2.000 X6 250 900 3596 X7 (X8) (X) X10 X11 900 Revenues Expected growth NOPLAT Invested capital ROIC DCF value Market value Premium (30%) Value creation Value creation acquirer value 20% X1 35% X3 (200) X2 X4 X5 WACC is assumed to be 10% for the Acquirer and 15% for the organic growth/acquired asset